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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
e. A transaction is always unconscionable when a big company makes a deal with a
consumer that is more to the benefit of the big company.
31) Which of the following have limited capacity to contract for the necessities of life?
a. minors and people who have been declared mentally incompetent by the courts
b. Aboriginals and the elderly
c. public authorities and Indian bands
d. corporations and alcoholics
e. minors
32) Which of the following agreements must be evidenced in writing in order to be
enforceable in all jurisdictions?
a. contracts of employment and contracts for the sale of interests in land
b. loans and guarantees
c. contracts with the government and contracts for the sale of interests in land
d. guarantees and contracts that may require more than one year to perform
e. contracts concerning an interest in land where there is no other exception to the Statute of
Frauds, such as part performance
33) Which of the following contracts may be set aside for mistake or frustration?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
a. Pam sells a computer for cash to a person she mistakenly thought she had known in high
school.
b. Pam says nothing about the quality and history of a painting that she sells to Dave,
despite knowing that he incorrectly believes the painting was worth more than its purchase
price.
c. Pam enters into a contract to sell a colt to Dave, but Dave does not know that Pam has
already sold the same colt to Donna.
d. Pam rents a cottage to Dave for a summer for $5000, and Pam later learns that because of
winter storms, it will unexpectedly cost her $30 000 to repair the cottage so that it meets the
needs of the rental contract.
e. Two parties enter into an agreement to purchase a container of goods, but completely
innocently unknown to either party is the fact that the container of goods was destroyed by
fire the previous night.
34) A force majeure clause
a. allows a contract that has been frustrated to be rescinded.
b. overrides the effect of an event that normally would constitute frustration.
c. is important primarily because of the possibility of duress or undue influence.
d. means that if there is a dispute regarding the effect of a contract, and there are more than
two parties to the contract, the majority view will prevail.
e. provides protection against the possibility of unconscionable conduct.
35) Salvatore created a contract with Acme Corp. Although the parties initially performed
their obligations without complaint or difficulty, a dispute has now arisen. Acme Corp
claims the protection of a force majeure clause. Which of the following statements is most
likely to be TRUE?
a. The company has discovered that Salvatore is under the age of majority.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
b. Salvatore has argued that the contract is unenforceable because it is not evidenced in
writing.
c. Salvatore claims that he made a mistake when he entered into the agreement when he
thought that there was insurance for what he bought, but what he had bought was destroyed
in a typhoon while it was in transit to him from the vendor, ACME Corp.
d. The company wants to escape from the contract on the grounds of frustration.
e. Salvatore has argued that he entered into the contract as a result of undue influence.
36) Adrian and Darah entered into a contract. After the agreement was partially performed,
Adrian successfully claimed that the contract is voidable. Which of the following
statements may be TRUE?
a. Adrian, who is an Aboriginal living on reserve land, had created a contract to sell that
land to Darah.
b. Adrian, who is 17 years old, had entered into a contract to purchase a set of computer
games from Darah.
c. Adrian, who has been declared mentally incompetent by a court, entered into a contract
to purchase food and shelter from Darah.
d. Adrian, who is an Aboriginal living in Toronto, entered into a contract to purchase
recreational sporting goods from Darah.
e. Adrian, who is 17 years old, entered into a contract to obtain life-saving medical services
from Darah.
37) Tajeash and Faye entered into a contract. Before either party began to perform under
that agreement, Tajesh successfully claimed that the contract is void. Which of the
following statements is most likely to be TRUE?
a. Faye was drunk when the contract was created.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
b. Tajesh is the name of a chartered corporation, and the contract dealt with non-essential
goods.
c. Tajesh is a minor, and Faye sold a shotgun to Tajesh even though Tajesh lacked the
necessary licence to purchase a shotgun.
d. Tajesh, who is 82 years old, sometimes acts unreasonably, and Faye knew that at the
time the contract was entered into.
e. Tajesh is not a citizen of Canada, and the contract was made in this country.
38) Malkit sold a house to Amanda. The evidence indicates that Amanda owed fiduciary
obligations to Malkit both before and after the agreement was signed. Which of the
following statements is TRUE?
a. Amanda has an absolute right to have the contract set aside.
b. The court will presume that Malkit entered into the contract as a result of Amanda's
undue influence.
c. In order to set aside the contract, Malkit must prove that the agreement is unfair to him.
d. The contract will be set aside unless Amanda proves that she was unaware of her
fiduciary obligations.
e. Malkit is entitled to receive Amanda's performance even though he is not required to
perform his obligations under the agreement.
39) Maeve entered into a contract with Tyler. Tyler and Maeve had equal bargaining power
and Tyler did not pressure Maeve at all to enter into the contract. Although she does not
suffer from a mental illness or intellectual disability, and although she is an adult, Maeve is
easily victimized in some commercial dealings. She is naive, immature, and not
sophisticated. As a recent immigrant to Canada, she speaks English reasonably well, but
she cannot read or write in English. She now wants to set aside her contract with Tyler on
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
the basis that it is an unconscionable transaction. Which of the following statements is most
likely to be TRUE?
a. A judge may enforce the contract even if it Maeve has entered into an improvident
bargain.
b. The contract will be set aside unless Tyler proves that the agreement actually favours
Maeve over himself.
c. A court will presume that the transaction is unconscionable as soon as it hears evidence
of Maeve's disadvantages.
d. The contract cannot be enforced unless Maeve received independent legal advice.
e. The contract will be set aside only if Maeve proves that Tyler exercised undue influence
over her.
40) Napolean wanted to borrow money from the Bank of Winnipeg. The bank was not,
however, fully convinced that Napolean would be able to repay the debt. It therefore
wanted some assurance from Napolean's mother, Josephine, that she would repay the loan
if necessary. Which of the following statements is most likely to be TRUE?
a. If it was not evidenced in writing, Josephine's promise will certainly be enforceable if it
was a guarantee, but it may not be enforceable if it was an indemnity.
b. If Josephine's promise must be evidenced in writing in order to be enforceable, the bank
may be able to satisfy that requirement by combining several documents even if those
documents do not refer to each other.
c. If Josephine's promise is not evidenced in writing, and if such writing is required by
statute, then neither Josephine nor Napolean needs to repay the loan.
d. If Josephine's promise must be evidenced in writing in order to be enforceable, then the
contract will be unenforceable unless both Josephine and the bank sign the relevant
document.
e. If Josephine's promise is properly classified as an indemnity, then the bank cannot
demand payment from her unless Napolean has first refused to pay.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
41) On Tony’s 21st birthday, he decides to treat himself and visits a car dealership after
spending the afternoon with some friends at the local pub. Though Tony was unaware of
his actions and displayed clear signs of intoxication, the car salesman had Tony sign a
contract binding him to purchase a brand new vehicle. Which of the following is true?
a. The contract is never voidable once the parties sign it.
b. The contract is voidable if Tony repudiates the contract by contacting the dealership
within a reasonable time after regaining capacity.
c. The contract is not voidable because Tony is of the age of majority, which means he is
held fully accountable in law.
d. The contract is voidable if Tony does not do anything to affirm the contract.
e. The contract is voidable only if it can be proven that Tony has a mental defect.
42) Jerry and four of his best friends form the Inventor’s Club, a private club that allows
inventors to get together and share new ideas. This organization is
a. a chartered corporation, meaning that it shares the same legal rights as someone who has
reached the age of majority.
b. an association, meaning that it shares the same legal rights as someone who has reached
the age of majority, but still cannot contract.
c. an association, meaning that it must have someone contract for its benefit.
d. a chartered corporation, meaning that it must have someone contract for its benefit.
e. a statutory corporation, meaning that it can contract, but has limited contractual capacity.
43) Stewart is a fifteen-year-old boy who comes from a very wealthy family. Throughout
his life, Stewart has been given expensive jewelry. In May, he and his mother got into an
argument and he decided to sell some of his jewelry at Frank’s Pawnshop. Excited about
the collection they were about to receive, the pawnshop clerk immediately entered into a
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
contract with Stewart to complete the transaction. Which of the following statements is
true?
a. There are some contracts that minors cannot avoid and contracts involving jewelry are
one example.
b. Minors that elect to avoid contracts can keep any benefit that they receive from it.
c. According to the Infancy Act, contracts with minors are never enforceable.
d. According to the Infancy Act, Stewart has a year to repudiate the contract and get his
goods back.
e. Because it is a pawnshop, the contract is considered affirmed and Stewart cannot get the
jewelry back.
44) Jane is interested in purchasing a condominium property from Full House Real-Estate
Group. She has just recently graduated college, so she does not have a credit record built.
Knowing this, she goes to Version Bank with her wealthy cousin Ted, who previously
agreed to assist her in buying a house after she finished school. Which statement is true?
a. Ted can indemnify the bank loan as an unconditional promise to pay only when Jane
defaults on her payments.
b. Ted can guarantee the bank loan as an unconditional promise to pay only when Jane
defaults on her payments.
c. Ted can guarantee the bank loan as a conditional promise to pay only when Jane defaults
on her payments.
d. Ted can indemnify the bank loan as a conditional promise to pay only when Jane’s
obligations become due.
e. Ted can indemnify the bank loan, but the indemnification is only enforceable if the
indemnity is signed under a notary public seal according to the Indemnification
Acknowledgments Act.
45) Eugenia is spending the weekend looking for a vehicle to buy. She has spent months
looking for one and it has left her impatient and frustrated. She comes across a vehicle her
neighbor, Jim, is selling and without hesitating she orally offers and gives him a down
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
payment of $900 for the car. Weeks go by and Jim has not heard back from Eugenia and he
has even tried contacting her numerous times. It turns out that Eugenia has bought another
vehicle from the Freedom Dealership and does not want to purchase Jim’s car any more.
Which of the following statements is true?
a. Eugenia is entitled to reimbursement because there is no written contract to enforce the
purchase.
b. Eugenia is entitled to reimbursement because under the Statue of Frauds, some contracts
are unenforceable unless they are sufficiently evidenced in writing.
c. Eugenia is not entitled to reimbursement. A down payment is refundable because it is not
part of the purchase price. It is just an incentive for the buyer to perform.
d. Eugenia is not entitled to reimbursement. A down payment acts as part of the purchase
price, but it also provides an incentive to perform.
e. Eugenia is entitled to reimbursement because she was obviously not serious.
46) Fred’s Appliances hired a new sales clerk, Jill, to engage customers and handle the
store’s paperwork. Jill was hired for her sincere smile and personality, but struggles with
the paperwork. One day, Jackson decides to purchase a washer and dryer from Fred’s
Appliances on a 3-year payment plan. Jill is filling out the contract and accidentally places
Jackson’s first name in the ‘Last Name’ column and vice-versa. However, the other
information, including his contact information, is added correctly. After 6 months, Jackson
stops making payments. When the store contacts him, Jackson claims that because his name
was recorded incorrectly on the contract, the contract is defective. Which statement is true?
a. The contract is defective because this mistake negates the existence of an agreement
between the parties.
b. The contract is not defective because the mistake made was not material.
c. The contract is not defective because the mistake made was material.
d. The contact is defective because the mistake does not create consensus ad idem, the
meeting of the minds.
e. The contract is defective and the store must return the payments made for six months.
47) Paula is mentally disabled. Which of the following is true with respect to her ability to
enter into contracts?
a. Paula can enter into contracts for the necessities of life and into beneficial employment
contracts.
b. Any contract entered into by Paula is voidable at her option.
c. Any contract entered into by Paula is void .
d. Any contract entered into by Paula is voidable if she repudiates it within 30 days of
signing it.
e. Only contracts which are illegal are voidable by Paula.
48) Lucy wants to sell her furniture store in Edmonton before she moves to Calgary in six
months. You offer to buy the establishment under one condition; the contract must include
a restrictive covenant in the form of a non-compete clause. Lucy agrees and signs the
contract making you the new owner of a furniture store. A year later, a mutual friend
informs you that Lucy is operating a furniture store in Calgary and it is performing very
well. When you hear this, you decide to take Lucy to court for breaching the restrictive
covenant of the contract. Which statement is true?
a. Unless there is unfairness in the bargaining process, the restrictive covenant will be
upheld as courts want to enforce the concept of freedom to contract between parties.
b. The restrictive covenant will be struck down as all restrictive covenants are a restraint of
trade and are against public policy.
c. All restrictive covenants are presumed to be against public policy unless they can be
shown to be reasonable.
d. All restrictive covenants are presumed to be against public policy unless they can be
shown to be geographically reasonable.
e. All restrictive covenants are presumed to be fair unless they can be shown to be
unreasonable.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
Essay Questions
1) What is the difference between voidable and enforceable contracts? Provide an example
of each in the context of whether a minor has the capacity to contract.
2) Charlie has bipolar disorder (also known as manic-depression). Usually, medication
helps to control her disorder. Lately, Charlie stopped taking her medication and started
drinking heavily. During a manic (up) phase, she dressed in an elegant suit, went to a BMW
dealership and signed a contract for the purchase of a new sports car. She financed the
transaction by putting a large deposit on her credit card, and drove the car off the lot that
same day. Charlie's family became very concerned. Describe the law as it pertains to
Charlie's capacity to contract. What should Charlie do? What should the car dealer do?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
3) Elsa is a member of an active neighbourhood association. The association runs frequent
community events, issues a monthly newsletter to residents, lobbies municipal government,
and engages in fundraising. Recently, they have decided to create a staff position to
coordinate their efforts. Their advisory committee has been discussing whether or not to
incorporate. Outline how the association's ability to enter contracts in conducting its
activities might impact its decision about incorporation.
4) How should your business manage risk when contracting with an unincorporated
association?
5) List three types of contracts that must be evidenced in writing in most jurisdictions.
Provide one example of each.
6) Ling is about to enter into a contract that will be carried out over the next year and a half.
Is it safe for her to assume that the contract will not be enforced if it is not evidenced in
writing in a jurisdiction where the Statute of Frauds applies?
7) Tinh agrees to purchase a block of land that Ed plans to sever from his property. Tinh
pays a large cash deposit to Ed, the closing date is set for six months away, and they shake
hands on the deal. Ed falls on hard times and he realizes he cannot subdivide his land since
he cannot afford to lose any equity or the bank will foreclose on his mortgage. On the
agreed closing date, he sends Tinh an email to back out of the deal. Worse still, Ed lost the
cash deposit at the horsetrack, and cannot afford to pay Tinh back. Ed feels terrible and
avoids Tinh's calls. Tinh sues Ed for breach of contract and specific performance. How will
the Statute of Frauds be applied in this case? What is the legal effect of Tinh and Ed's deal?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
8) From the perspective of risk management, what practices should be adopted by
businesses transacting in jurisdictions that have a Statute of Frauds?
9) Explain the distinction between the effects of a mistake that prevents the creation of a
contract and a mistake that renders the purpose or performance of a contract impossible.
Provide an example of each.
10) Rosa immigrated to Canada as a teenager. She worked her whole life to support her
family and never received a formal education. While her spoken English is good, her ability
to read English is limited. An elderly woman now, Rosa lives in a care facility. A
representative of the facility presented her with several pieces of paper to sign. He said that
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
they were simply standard forms that every resident had to sign. She took the forms and
returned them signed the following week. Later, she mentioned to her son, Paulo that she
had signed some forms, but had been too ashamed to admit that she could not read them.
The forms required Rosa to give permission to the facility, evidenced by her signature, to
make automatic withdrawals from Rosa's bank accounts. Rosa is not comfortable with this.
Will Rosa be bound to her signature? Why? Describe the defence she is most likely to raise
and explain whether it is likely to succeed.
11) In 1824, Justice Burrough said, "Public policy ... is a very unruly horse and once you
get astride it you never know where it will carry you." In 1971, Lord Denning MR said that
with a good judge "in the saddle, the unruly horse can be kept in control. It can jump over
obstacles. It can leap the fences put up by fictions and come up on the side of justice."
Explain what each judge meant in the above quote. State which judge, in your opinion, is
correct. Substantiate your answer with a brief discussion of the relevant concepts from the
text.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
12) As part of a large multinational corporation, you are working on a deal to buy a small
company from a group of young upstarts who will all benefit handsomely from the
transaction. It is your custom to include a restrictive covenant in such contracts to prevent
such young upstarts from directly competing with the company they just sold. Explain the
approach taken by courts to covenants in restraint of trade and then provide an example of a
restrictive covenant that is likely to be upheld if challenged in court, and an example of one
that is likely to be struck down if challenged in court.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
13) Define "fiduciary relationship" and provide an example. How would a business person
who has a fiduciary relationship best conduct a transaction so as to avoid legal problems?
14) Outline three situations where a court might set aside a contract because of unfairness
during bargaining. What are the requirements to prove each, and who has the onus to prove
what in court?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 10: Contractual Defects
15) Contracts are part of private law. A key concept of private law is that parties are at
liberty to create and define the legal obligations they owe to one another. Discuss whether
you agree that judges should be able to step in and set aside certain transactions on the basis
that they think an agreement is unjust. Does this interfere with the core concept of private
law? Explain your answer.
